Tax liens
A portion of CapitalSource’s portfolio is comprised of asset-based, or secured, loans made to companies in the health-care and real estate sectors. One of those companies is Aeon Financial, a Chicago-based firm that purchases tax liens on residential properties from municipalities.
(NIKKI KAHN/THE WASHINGTON POST) - John Delaney helped found loan financing firm CapitalSource in 2000.
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Garagiola has accused CapitalSource, in conjunction with Aeon, of foreclosing on homes throughout Maryland and Ohio in order to collect those liens. CapitalSource Bank FBO Aeon Financial LLC is listed as the plaintiff in hundreds of foreclosure proceedings.
Aeon Financial chief executive Robert Brown said CapitalSource was not involved in bringing any of the complaints. He said Aeon obtained a loan from CapitalSource in 2009, secured by a portfolio of tax liens. Aeon, he said, routinely includes the name of the lender it borrowed money from when it attempts to foreclose on homeowners who are delinquent in paying their tax liens.
By doing so, Brown said, it becomes easier for CapitalSource to seize the collateral in the event Aeon defaults on its loan. “It’s extra protection for the lender,” he explained.
Several finance attorneys said Aeon’s model, while not widely practiced, has been followed by some other companies.
CapitalSource spokesman Michael Weiss said the company has “no direct involvement in the tax lien business . . . we make loans to companies, but we are not in the business of owning or operating them.”
But Garagiola’s campaign manager, Sean Rankin, contends that CapitalSource “invested specifically via Aeon to purchase liens with an intention of forcing quick foreclosures by taking homes from families.”
Pamela Peterson Drake, head of the finance department at James Madison University, argues that it is unfair to lay blame at CapitalSource’s doorstep.
“Selling tax liens is a legitimate business that gives municipalities cash to take care of public services,” she said. “A tax lien just means someone has been delinquent on the taxes they owe to the county. When counties say enough is enough, they sell the liens to recoup some money.”
Rankin, the Garagiola aide, said the issue is not about the business process. “It’s a question of what John Delaney thinks is an acceptable way to make tens of millions of dollars, and how he has made his money tells you a lot about him and his character, and frankly, many of CapitalSource’s business practices like this foreclosure scam are unethical.”
Schall, Delaney’s campaign manager, replied: “What’s unethical is making baseless charges without any proof.”
High interest rates
Critics of commercial lenders have equated the business to loan-sharking because of the high interest rates involved — a charge that Garagiola has lobbed at Delaney throughout the race.
“Lenders that lend to people that can’t get credit elsewhere are going to charge a higher interest rate because of the risk involved,” said James Angel, associate professor of finance at Georgetown University’s McDonough School of Business. “This is not necessarily exploitative.”
Robert McMurrey, chief executive of Teletouch Communications in Fort Worth, turned to CapitalSource in 2004 for a $12 million line of credit to finance the growth of State Hawk Security, a subsidiary in the alarm business.
“Not a lot of people want to lend to the home and commercial security industry because in the past there were businesses who played games with accounting,” McMurrey said. “Some people may say the interest is too high, but CapitalSource is like any other specialized lender.”
Federal audit
Early in the campaign, Garagiola noted an ongoing Internal Revenue Service audit of CapitalSource stemming from its days as a real estate investment trust. REITs save money on taxes because they must distribute at least 90 percent of their taxable income as dividends.
In a Securities and Exchange Commission filing, company officials said, “Our senior management had limited experience in managing a portfolio of assets under the highly complex tax rules governing REITs and we cannot assure you that we operated our business within the REIT requirements.”
Rankin considers the explanation an indictment of the judgement and character of CapitalSource, and ultimately its leader.
Weiss dismissed the criticism, calling it a “routine audit.”
Staff writer Ben Pershing contributed to this report.
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